Newly Released IRS Issue Snapshots Regarding Self-Dealing of a Private Foundation

IRS Issue Snapshots on Self-Dealing of Private Foundations

The IRS recently released two Issue Snapshots on self-dealing of Private Foundations involving the sale or exchange of property and on self-dealing of Private Foundations involving the lending of money or another extension of credit.

The Issue Snapshot discussing self-dealing by Private Foundations involving the sale or exchange of Property is located here. The Issue Snapshot discussing self-dealing by Private Foundations involving the lending of money or other extension of credit is located here.

What are IRS Issue Snapshots?

IRS Issue Snapshots are employee job aids that provide analysis and resources for a given technical tax issue. Additional Issue Snapshots may be accessed on the IRS' website.

Taxes on Self-Dealing, Special Rules

Internal Revenue Code (“IRC”) Section 4941(d)(1) generally provides that self-dealing means any direct or indirect:

  • (A) sale or exchange, or leasing, of property between a private foundation and a disqualified person;

  • (B) lending of money or other extension of credit between a private foundation and a disqualified person;

  • (C) furnishing of goods, services, or facilities between a private foundation and a disqualified person;

  • (D) payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person;

  • (E) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and

  • (F) agreement by a private foundation to make any payment of money or other property to a government official.

IRC Section 4941(d)(2)(E) provides an exception regarding payment of compensation. The payment of compensation and the payment or reimbursement of expenses by a private foundation to a disqualified person for personal services which are reasonable and necessary to carry out the exempt purpose of the private foundation shall not be considered an act of self-dealing if the compensation is not excessive. Treas. Reg. Section 53.4941(d)-3(c)(1). This exception to self-dealing is referred to as the personal service exception. The exception does not apply in circumstances where the disqualified person has such status because they are a government official.

Who is Considered a “Disqualified Person”?

The term "disqualified person" is critical to the treatment and status of exempt organizations classified as private foundations. IRC Section 4946 provides a list of disqualified persons with respect to a private foundation. The following list identifies who constitutes a disqualified person for purposes of the statute:

  1. Substantial Contributors

  2. Foundation Managers

  3. Owner of more than 20% interest of certain organizations that are substantial contributors

  4. Family Members of persons described above (in 1-3)

  5. Corporations in which persons described above (in 1-4) hold more than a 35 percent voting power

  6. Partnerships in which persons described above (in 1-4) hold more than a 35 percent profit interest

  7. Trusts or Estates in which persons described above (in 1-4) hold more than a 35 percent beneficial interest

  8. Certain Private Foundations which are effectively controlled by the person or persons in control of the foundation in question

  9. Governmental Officials

You can read a short summary of each type of disqualified person mentioned above on the IRS website here.

Questions Regarding Self-Dealing Private Foundation Transactions?

Of the rules for a private foundation, those regarding self-dealing are some of the most complex and have some of the most potentially serious ramifications for if violated. If you have additional questions regarding self-dealing transactions, nonprofit attorney Jonathan Grissom can help. Please contact us via the button below.

Nonprofit ComplianceJonathan Grissom, AttorneyPrivate Foundations